Legacy Refining And EV Units Will Falter Amid Policy Headwinds

Key Takeaways

• Structural decline in refining and petrochemical markets and regulatory burdens threaten SK Innovation's legacy businesses, putting long-term pressure on profitability and asset value.
  
• High capital demands, weak battery segment performance, and strong competition constrain growth, raise leverage, and increase risks to future earnings and shareholder returns.
  
• Strategic mergers, global expansion, financial restructuring, and advanced technology investments position SK Innovation for long-term growth, improved margins, and diversified revenue streams.

Catalysts

Engages in the production and sale of petroleum products, lubricants, and base oil in South Korea and internationally.

• Intensifying global decarbonization policies and the ongoing shift away from fossil fuels will steadily erode demand for SK Innovation's core refining and petrochemical segments, resulting in sustained revenue declines and long-term pressure on group-wide margins as legacy business lines become increasingly uncompetitive.
  
• Persistent underperformance and heightened execution risk in the EV battery business will likely undermine growth, as SK Innovation faces strong global competitors and must contend with policy headwinds, the phase-out of key EV subsidies in the US, and tariff-driven uncertainty, all of which contribute to margin compression and lower-than-expected operating earnings from its flagship growth area.
  
• Escalating regulatory pressures, exposure to unpredictable carbon pricing, and tightening ESG requirements around the world will significantly raise ongoing compliance costs, straining net margins and threatening large-scale asset write-downs or stranded asset scenarios for SK Innovation's oil and gas assets.
  
• Chronic capital intensity across both battery ramp-up and refinery modernization will result in persistently high leverage and interest burdens, as evidenced by the recent surge in net debt and ongoing large-scale capital raising; this severely limits free cash flow available for shareholder returns or future growth investments, heightening balance sheet risk.
  
• Structural overcapacity in Asia-Pacific refining and the accelerating competitiveness of alternative energy storage solutions increase the likelihood of further refining margin compression and asset impairments, exacerbating SK Innovation's vulnerability to cyclical downturns and contributing to long-term earnings volatility and value destruction.

SK Innovation Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on SK Innovation compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming SK Innovation's revenue will decrease by 2.2% annually over the next 3 years.
• The bearish analysts are not forecasting that SK Innovation will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate SK Innovation's profit margin will increase from -3.1% to the average KR Oil and Gas industry of 1.6% in 3 years.
• If SK Innovation's profit margin were to converge on the industry average, you could expect earnings to reach ₩1135.6 billion (and earnings per share of ₩6239.46) by about August 2028, up from ₩-2388.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, up from -6.7x today. This future PE is greater than the current PE for the KR Oil and Gas industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.0%, as per the Simply Wall St company report.

SK Innovation Future Earnings Per Share Growth

Risks

• The planned merger of SK On and SK Enmove is expected to generate significant business and financial synergies, including an additional ₩200 billion EBITDA by 2030, which would enhance earnings growth and strengthen the company's long-term profitability profile.
  
• Strategic international expansions and increasing production utilization in the US and Europe, alongside winning new orders and deepening relationships with major automakers such as Ford and Hyundai, position SK Innovation to capture multi-year demand growth in the EV battery sector, supporting rising revenue and long-term market share.
  
• Substantial capital increases and financial structure enhancement, including a ₩5 trillion capital raise and aggressive net debt reduction plans, are likely to improve SK Innovation's balance sheet, reduce interest expense burdens, and enable investment in high-growth business areas, strengthening future earnings and net margins.
  
• Ongoing investments in advanced battery technologies and vertical integration, as well as the development of proprietary solutions such as EV thermal management from the SK Enmove synergy, could drive product differentiation and margin expansion, leading to sustainable growth in revenue and operating profit.
  
• Robust global energy demand and the successful ramp-up of new resource discoveries and LNG projects, such as the CB gas field coming online in the fourth quarter and continued strong cash flows from traditional operations, will provide critical funding for green and energy transition initiatives, stabilizing SK Innovation's earnings base and enabling profitable diversification.

Valuation

• The assumed bearish price target for SK Innovation is ₩61856.34, which represents two standard deviations below the consensus price target of ₩121608.7. This valuation is based on what can be assumed as the expectations of SK Innovation's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₩180000.0, and the most bearish reporting a price target of just ₩55000.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₩71949.4 billion, earnings will come to ₩1135.6 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 12.0%.
  
• Given the current share price of ₩107500.0, the bearish analyst price target of ₩61856.34 is 73.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.